Pension Plan Finances Aided By Global Interest Rate Rises

Higher discount rates in all major retirement markets except for Brazil led to a tentative improvement in the funded status of global pension plans during the second quarter of 2004. The higher discount rates which lead to lower defined benefit

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Higher discount rates in all major retirement markets except for Brazil led to a tentative improvement in the funded status of global pension plans during the second quarter of 2004. The higher discount rates – which lead to lower defined benefit pension liabilities – offset poor investment returns which were only marginally positive in most markets due to global equity nervousness caused by continuing geopolitical instability.

The report, Towers Perrin Global Capital Market Update: Second Quarter 2004, examines how defined benefit pension plans in major retirement markets worldwide have been affected by global capital market changes. The analysis examines the impact of changes in stock and bond markets on a benchmark plan in each country, with liabilities estimated under accepted international accounting standards and adjusted to reflect current interest rate and other market conditions in each country.

In the UK, discount rates have risen four times in the last eight months, with consecutive 25 basis-point rises in May and June. Pension plan equity returns were positive: 2.2% for domestic equity and 1.61% for international equity. Overall, the UK benchmark portfolio’s return was 0.85% and the UK benchmark plan improved by 3% on the second quarter. However, the UK benchmark plan is still only at 60% of its value on 1st January 2000.

“This report shows that the road back to fully funded pension plans will be long without real growth in sponsor contributions,” said Nigel Bateman, Principal in Towers Perrin’s Global Consulting Group. “The fluctuating returns of equities and fixed income investments should also act as a reminder to both trustees and the company sponsors to ensure they are confident their plan’s asset allocation strategy meets their short and long-term financing needs.”

The picture varies in different countries: of the countries included in the survey, Towers Perrin’s benchmark plans have all -with one exception – performed positively in Q2 2004 so far: Canada (6.13%), Japan (5.50%), the Eurozone (5.07%), UK (3.09%), the US (2.52%) and Australia (2.87%). Only Brazil had a negative performance in the second quarter.

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